Perspectives
R E P R I N T
The Experience Curve
There is a hypothesis that costs follow a definite
pattern which is a function of accumulated pro-
duction experience. If further research validates
this theory then the implication for business man-
agement is far reaching.
If we consider business competition as a system
in equilibrium, then this hypothesis introduces
a whole new set of relationships which are of
critical importance in establishing the stability of
competition. The whole of business policy is
affected from manufacturing cost standards to
export policy.
Apparently the following conclusions can be
justified :
• Reductions in cost of manufacture and distribu-
tion should be predictable.
• Stability of prices on purchased material should
be predictable.
• New products should be priced as low as
necessary to dominate their market segment
or probably not be sold at all.
• Market share must be maintained at all costs as
long as growth rate exceeds the anticipated rate
of return.
• The value of market share can be calculated
with enough accuracy to permit determination
of the return on investment as the result of any
change in share.
• Export potentials of a product can be approx-
imated by relating comparative advantage
derived from experience levels.
• The cost trade-offs of low labor cost versus con-
centrated production can be approximated.
• The probable stability of prices can be forecast.
Many of these issues are of major importance
in formulating the basic policies which represent
corporate strategy. Even if the experience-cost
hypothesis should prove to be only partially
T H E B OSTON C ON S U LTI NG G ROU P
N ° 1 6
applicable to these questions, it is still a major
insight if it provides any significant understand-
ing of these basic relationships.
Price and cost data show that costs decline by some
characteristic amount each time accumulated experience
is doubled. Given this, it is clear that not only can
one’s own costs be projected, but costs relative
to competitors can also be estimated, given some
rather straightforward information about the
market.
The characteristic decline is consistently 20-30%
each time accumulated production is doubled.
This decline goes on in time without limit (in
constant dollars) regardless of the rate of growth
of experience. The rate of decline is surprisingly
consistent, even from industry to industry.
However, these observed or inferred reductions in
costs as volume increases are not necessarily auto-
matic. They depend crucially on a competent
management that seeks ways to force costs down
as volume expands. Production costs are most
likely to decline under this internal pressure. Yet in
the long-run the average combined cost of all ele-
ments should decline under the pressure for the
company to remain as profitable as possible. To
this extent the relationship is of normal potential
rather than one of certainty. However, competition
characteristically produces survivors who achieve
the full potential.
Variances in “costs” shown in plotting experience
curves are probably best interpreted as indicating
change in rates of expenditure, or cash flows. Such
costs should include all of the cost elements which
may have a trade-off against each other. This
therefore means all costs of every kind required
to deliver the product to the ultimate user, includ-
ing the cost of intangibles which affect perceived
value. There is no question that R & D, sales
expense, advertising, overhead, and everything
else is included.
1
Perspectives
R E P R I N T
… T H E E X P E R I E N C E C U R V E
Any failure of the producer to relate any one
of these cost elements properly to the other will
have a degrading effect on the cost performance
in serving the end user. This may be why the
experience curve works, as it weeds out everyone
who has not used the optimum combination of
all cost elements compared to his competitors’
combinations. This also distinguishes experience
curves from the well-known learning curve,
the later relating only to labor and production
inputs.
The growth rate of a product is an important
factor in interpreting experience curves. If the
production of a product is not growing, then the
rate of cost decline per year gradually slows down
and approaches zero.
When accumulated units of a product are increas-
ing annually at a constant percentage rate, then
T H E B OSTON C ON S U LTI NG G ROU P
N ° 1 6
each year of product experience produces approxi-
mately the same percentage effect on cost.
If competitors maintain the same relative market
shares and have roughly equivalent histories of
experience, then their costs will tend to move in
parallel. If competitors’ market position changes,
so do their relative costs.
There is a large amount of empirical evidence that
this relationship is so fundamental that any devia-
tion should be explainable. The implications for
corporate strategy development are so sweeping
that it is difficult to overstate them.
The theory of cost versus experience is more fully devel-
oped in the book Perspectives on Experience pub-
lished by The Boston Consulting Group.
© The Boston Consulting Group, Inc. 1968
2